02273cam a22002777 4500001000700000003000500007005001700012008004100029100001800070245012600088260006600214490004200280500001900322520100200341530006101343538007201404538003601476690011701512690013101629700002101760700002001781710004201801830007701843856003801920856003701958w10109NBER20161209233741.0161209s2003 mau||||fs|||| 000 0 eng d1 aAthey, Susan.14aThe Optimal Degree of Discretion in Monetary Policyh[electronic resource] /cSusan Athey, Andrew Atkeson, Patrick Kehoe. aCambridge, Mass.bNational Bureau of Economic Researchc2003.1 aNBER working paper seriesvno. w10109 aNovember 2003.3 aHow much discretion should the monetary authority have in setting its policy? This question is analyzed in an economy with an agreed-upon social welfare function that depends on the randomly fluctuating state of the economy. The monetary authority has private information about that state. In the model, well-designed rules trade off society's desire to give the monetary authority discretion to react to its private information against society's need to guard against the time inconsistency problem arising from the temptation to stimulate the economy with unexpected inflation. Although this dynamic mechanism design problem seems complex, society can implement the optimal policy simply by legislating an inflation cap that specifies the highest allowable inflation rate. The more severe the time inconsistency problem, the more tightly the cap constrains policy and the smaller is the degree of discretion. As this problem becomes sufficiently severe, the optimal degree of discretion is none. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE5 - Monetary Policy, Central Banking, and the Supply of Money and Credit2Journal of Economic Literature class. 7aE6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook2Journal of Economic Literature class.1 aAtkeson, Andrew.1 aKehoe, Patrick.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w10109.4 uhttp://www.nber.org/papers/w1010941uhttp://dx.doi.org/10.3386/w10109